Adding cost-efficient foreign operations for tech companies has become a staple in the industry. Opting for a Nearshore location instead of Offshore provides a significant advantage for firms requiring real-time collaboration. Mexico is North America’s de facto nearshore option, offering the ideal combination of Talent and Cost. As a result, companies of all sizes are expanding more than ever to Mexico, employing various strategies based on the scale of their operations and goals.
The country could seize half of the total foreign investment inflows in Latin America continent in the coming years and it’s already the USA’s top trading partner. This didn’t happen overnight, as the USMCA Trade Agreement has been in place since 1994, and the Maquiladora program began many years before that. It created an interconnected ecosystem of specialized vendors and solid infrastructure that offers soft-landing options for expansion into the country.
This is good news for tech companies as they have more options than ever to expand into Mexico. However, the abundance of choices can also create confusion. Additionally, having many companies moving into the region means hearing success stories, like Salesforce’s new CoE, but also those that were not as successful, that substantially overran their budgets or had to abort.
For those developing financial and risk evaluation scenarios for their expansion into Mexico, what can they expect when using the Do-It-Yourself (DIY) approach? Alternatively, if they hire a local provider to facilitate the expansion, which engagement model works best? And what should be validated, particularly if you’re unfamiliar with Mexico?
DIY strategy
For decades, companies in the Financial, Healthcare, CPG, Travel, and IT Industries, have opened offshore/nearshore operations in cost-efficient countries, on their own or with the assistance of a local provider. These centers provide services to the parent organization and are known as Global Business Services (GBS), Shared Services Centers (SSC), Global In-house Centers (GICs), or Captives.
If done right, setting up a new foreign operation independently could lead to long-term savings when compared to outsourcing it to a local tech company. This approach also mitigates the risk of training potential competitors as they do target the same type of customers. But more importantly, it ensures that the accumulated knowledge in the new location remains within the company, unlike outsourcing to an IT Vendor, where expertise might be lost when team members are reassigned, or the contract ends.
In the DIY approach, fixed and overhead costs are significantly higher in the early years of growth, leading to a higher cost per resource. Scaling down can also be challenging when reality doesn’t match the initial plan. This could be a challenge for IT Consulting Companies that need to tweak their employee base and operating structure more often, including layoffs when necessary, but it is much harder and costly to do it in Latin America which has laws that regulate this practice.
Be aware that Mexico has the lowest unemployment rate in the past 20 years, so new companies hiring in the region will quickly find that a job post of an unknown brand will not get the attention they were hoping for. In addition to this, during the pandemic, there was a surge in hiring for remote positions with high salaries from companies without a local presence. When the global economy adjusted, these jobs ended abruptly, leaving top talent hanging with no place to go. Talent has plenty of options and tends to prefer companies that have a strong local history for employment stability.
The DIY approach has the inherent learning curve associated with expanding to a new country. Risk-averse companies will increase their spending in advisory firms (legal, tax, labor, finance, etc.) to help design their expansion plans and try to minimize surprises and overspending. Be sure to hire known firms specialized in their field, as those who underestimate the importance of their choice of advisors may learn the hard way, that there are also “accountants, lawyers, and public notaries who are out to scam you“.
Soft-landing options
For companies that seek the assistance of a local provider to help them reduce entry risks and gain local expertise to increase the success rate of their new operations, Mexico offers various options by operation size and industry, such as the Shelter Model for Manufacturing.
Although it may seem like there are many options, the services can be easily categorized into just three main choices. The first is for running small and temporary operations using an Pilot Team, the second is for building a large center with a set size and functionality that will be transferred after a set period (Build-Operate-Transfer), and the third, using a framework that is flexible enough that can go from small to large with a pay-as-you-grow structure and can be transferred as well (Subsidiary-as-a-Service).
1. Pilot Team (also known as Managed Team, Incubator Subsidiary, Managed GCC, or Pilot Program)
This option is popular in the IT industry for companies looking to hire a team for a specific duration or to gain a temporary presence in the country to support a global project/rollout. It’s also used to test the region and talent before fully committing to a permanent operation.
The local vendor creates and oversees a temporary operation for the foreign company. This includes collaborative setup planning, recruiting and screening specialized talent, hiring, securing temporary facilities, legal documentation (compliance), and procuring necessary items and logistics, such as travel. While the team is hired under the local vendor’s entity, they are managed by the foreign company.
Pros: The vendor will provide all the services needed to run the operation, which will save money for the company by not hiring multiple vendors or subcontracting others. It avoids working with a potential local competitor. Great choice for running a pilot in the region and validating assumptions.
Cons: Depending on the vendor, the hired talent might be committed to other projects, making it difficult to retain them if they excel or develop valuable expertise for the company. Mexico’s strict labor laws on temporary hiring prohibit certain scenarios. Some vendors don’t have the infrastructure and support staff to scale to large operations.
2. Build, Operate, and Transfer (also known as BOT, Owned GCC)
This setup model gained popularity in the early-to-mid 2000s as many enterprises began their offshoring journey and sought the expertise of local partners. A local vendor is engaged by a foreign company to design, establish, and operate initially the new Capability Center/Captive Center with a pre-defined size for a set period, which will then be transferred to the foreign company after the contract ends. The center will utilize the client’s processes, tools, and methodologies. Its primary goal is to ease the challenges of setting up a new operation in an unfamiliar location.
Commonly, the management oversight is done by the vendor, and the foreign company has limited say in decisions until operations are transferred.
This involves building from the ground up, including new legal entity, structure, and personnel. The vendor will focus on achieving local operational efficiency. It is used by different industries for building a Center of Excellence (CoE), GBS, SSC, GSS, or Helpdesk/Delivery Centers. Traditionally, the main goal is to support the organization rather than develop the new region where it is established.
Vendors often establish long-term relationships with clients and continue to deliver services that are project-based after the transfer phase of the BOT.
Pros: Avoids the local challenges of a steep learning curve, which can lead to higher costs and unexpected risks. By partnering with a local, hiring turnaround time improves as the foreign company gains access to its network and recruitment know-how. Higher success rate of the intended operation by lowering the learning curve.
Cons: Takes as much time as establishing a new operation. Offers little flexibility in changing the initial planned size and structure. Does not reduce local operating expenses like other soft-landing options.
3. Subsidiary-as-a-Service (also known as GCC-as-a-Service, Virtual Subsidiary, Virtual Captive, and Micro-Capability Centers).
The Subsidiary-as-a-Service (SUBaaS) framework is an evolution of initial soft-landing options like the BOT or Mexico’s Shelter Model. Over the years, vendors grew their infrastructure and capabilities in their countries to achieve greater economies of scale and end-to-end expertise. With these advancements and the proven effectiveness of the as-a-service model, SUBaaS has become more common.
As-a-service options like Salesforce or AWS, enabled companies of all sizes to access solutions that were previously only available to a few because of the considerable upfront investments in infrastructure, and support teams. It also eliminated lengthy implementation timelines and shifted the maintenance responsibilities away from the client. Like other aaS solutions, SUBaaS avoids setup costs by following the pay-per-use model, starting in weeks, not months while reducing total operating expenses through economies of scale. This agile approach allows businesses to scale and add functionalities as needed without committing to a specific structure size.
Tech Companies start operations faster under an existing MEX corporation, sheltered from risks and with lower operating costs. It can start big or small, scaling in size and functionality when needed. The foreign company owns the operation and management oversight while the local vendor provides administrative support and the infrastructure. It has the benefits of the BOT model of assisting to bypass the initial learning curve for a higher success rate but also provides a reduction of setup costs and operating expenses.
After a period, operations can be transferred, but it’s important to note that the shared infrastructure and expert teams are provided by the local vendor. The new entity will need to invest to add these resources for their new independent operation. This is why many customers continue renewing the service unless they grow too large, similar to using AWS.
SUBaaS customers use it not only for running GCCs, CoEs, or Temporary Teams, but also to create regional offices to develop their presence in the region, or to foster innovation in a talent-rich environment, creating multi-functional centers, which is why the “Subsidiary” term is preferred.
According to ISG this approach “enables critical elements of innovation: agility, scalability, cost-efficiency and versatility”. Large enterprises also use it, as it is “a cost-effective, capex-friendly solution for companies exploring new digital initiatives by allowing them to test the feasibility and determine true value potential.”
Pros: Adds Flexible and Scalable Operations. It avoids the initial learning curve like the BOT, but also focuses on reducing initial setup costs and operative expenses, creating a more cost-efficient structure. Increases local success rate by gaining industry-specific know-how. If operations must be halted unexpectedly, significantly reduce shutdown cost exposure. Faster time to value.
Cons: It is industry-specific, so is not available to all types of businesses. Due to the need for large infrastructure, specialized teams in all key areas, and an extensive local network to achieve true economies of scale, there are few providers per country.
In summary, don’t fret about seeing multiple names, like Micro-Global-Capability-Center-as-a-Service Model, it will still fall as one of the three options.
The Pilot Team model is ideal for short-term or trial initiatives, offering agility and a faster market entry, but it may face talent retention challenges and regulatory limitations for certain cases. BOT is suited for large, long-term operations with predefined structures, reducing entry risks with local operational expertise, albeit with less flexibility, and doesn’t reduce operating expenses. SUBaaS, an evolving model, offers a flexible and scalable framework, reducing initial setup costs and ongoing operational expenses while ensuring faster time-to-value.
What to Validate
Companies may be new to Mexico, but common sense remains crucial when creating a vendor checklist in an unfamiliar market. Here are some key factors to consider when evaluating soft-landing service providers:
- End-to-end Expertise: Ensure the vendor has in-house, A-to-Z operational expertise, such as international laws, real estate, finance, tax and regulatory compliance, recruitment, immigration, procurement services, labor laws, HR and benefits administration, and so on. If they subcontract a third party it will increase total costs and will not have the experience to predict how changes in one area affect others.
- Local Value Added. It means having a long track record in the region, needed to build relationships with local authorities, universities/schools, and local industry players.
- Nationwide Presence: When entering a new country like Mexico, the vendor should have a presence in major cities. Vendors familiar with only one city will offer limited advice, much like the saying, “If all you have is a hammer, everything looks like a nail.”
- Scalable Infrastructure: Confirm that the vendor already has the infrastructure and team to scale with your needs. This ensures you can benefit from economies of scale and that they already have helped others to scale as well.
- Focus matters: When hiring a service provider to run a pilot operation/managed team, confirm they are only providing soft-landing services to foreign companies. If you hire an IT Service Provider that added this service to their portfolio, could result in training a competitor.
You already know that you wouldn’t hire a Mexican Vendor to help you expand your operations in China, as you want to avoid a provider who will learn alongside you. With Mexico as a global hotspot, expect many companies to offer their services, from accounting firms expanding their offerings to newcomers who previously operated in other countries and saw how their regular customers were asking about Mexico. Latin America is known for frequently changing regulations and policies, especially when new presidents take office, impacting all areas, including labor laws, accounting, and taxes.
As a rule of thumb, evaluate vendors that have passed several presidential terms. This demonstrates their ability to help foreign clients navigate new landscapes effectively. Additionally, those with a long-standing presence in Mexico have built true economies of scale and will not have the option to close business and return to their country because it got more complicated than they thought.
Conclusion
Choosing a soft landing option over the DIY approach often makes sense due to the high upfront costs and significant risks associated with the learning curve of going it alone. Besides, it allows foreign companies to own and direct operations from day one, while sheltered from local risks. For Private Investors that are leveraging the nearshoring trend, this approach adds certainty to the complex process of expansion, especially when working within a tight timeline.
With Mexico leading as a preferred nearshore destination for tech companies, and its proven soft-landing options, the path to success should be straightforward, right? However, selecting the right vendor is crucial; it can mean the difference between a smooth, successful expansion and a challenging, obstacle-filled experience.
Evaluating a provider can be a lengthy process with many factors to consider, but it ultimately boils down to two key points. First, be sure the provider specializes in your industry, whether it’s healthcare, enterprise software, finance, or manufacturing. This is how they differentiate, as they have developed industry/community hubs with networks that benefit their customers, so look for the provider with the most experience in your type of business.
Established soft-landing service providers offer all three options, allowing companies to discuss their specific concerns and goals to determine the most suitable approach together. It’s important to recognize that a one-size-fits-all solution doesn’t apply, and the choice of model isn’t solely based on company size. Both SMEs and large corporations utilize all three models. With an Economy that is up and down, SMEs need to add nearshore operations and often opt for the SUBaas model, while even public companies may choose the Pilot approach when the business opportunity isn’t substantial enough to justify the risks associated with entering a new country.
Ultimately, the choice of expansion strategy should align with your company’s risk tolerance, and budget. Whether you opt for a DIY approach or engage local providers, it’s essential to thoroughly assess the vendor’s capabilities, industry expertise, and track record of local success. While expanding into Mexico presents its challenges, now is arguably the most opportune time to do so, thanks to the well-established support structures and resources available.
